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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the transition period from                      to                     

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days.   YES x   NO o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).   YES x   NO o

     As of May 2, 2003, there were 126,819,270 shares of Registrant’s Common Stock outstanding.
 
 

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LAM RESEARCH CORPORATION
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

LAM RESEARCH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)

(1) Derived from June 30, 2002 audited financial statements.

See Notes to Condensed Consolidated Financial Statements.

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LAM RESEARCH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)

See Notes to Condensed Consolidated Financial Statements.

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LAM RESEARCH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

See Notes to Condensed Consolidated Financial Statements.

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LAM RESEARCH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 30, 2003
(Unaudited)

NOTE A — BASIS OF PRESENTATION

     The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements of Lam Research Corporation (the “Company” or “Lam”) for the fiscal year ended June 30, 2002, which are included in the Annual Report on Form 10-K, File Number 0-12933. The Company’s Form 10-K, Forms 10-Q and Forms 8-K are available online at the Securities and Exchange Commission website on the Internet. The address of that site is http://www.sec.gov. The Company also posts the Form 10-K, Forms 10-Q and Forms 8-K on the corporate website at http://www.lamrc.com.

     The Company’s reporting period is a 52/53-week fiscal year. The Company’s current fiscal year will end June 29, 2003 and includes 52 weeks. The quarters ended March 30, 2003 and March 31, 2002 included 13 weeks.

     Reclassifications: Certain amounts presented in the comparative financial statements for prior years have been reclassified to conform to the 2003 presentation.

NOTE B — RECENT ACCOUNTING PRONOUNCEMENTS

     Impairment or Disposals of Long-Lived Assets: In August 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 144 (“FAS 144”) “Accounting for the Impairment or Disposal of Long-Lived Assets”. FAS 144 supersedes FAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of”, and applies to all long-lived assets (including discontinued operations). The Company adopted FAS 144 effective at the beginning of fiscal 2003. The adoption of FAS 144 did not have a material impact on the Company’s consolidated financial position or operating results.

     Costs associated with Exit or Disposal Activities: In July 2002, the FASB issued Statement of Financial Accounting Standards No. 146 “Accounting for Costs Associated with Exit or Disposal Activities” (“FAS 146”). FAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)” (“EITF 94-3”). The principal difference between FAS 146 and EITF 94-3 relates to FAS 146’s requirements for the timing of recognizing a liability for a cost associated with an exit or disposal activity. FAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when

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the liability is incurred. Under EITF 94-3 a liability for an exit cost was recognized at the date of an entity’s commitment to an exit plan. FAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002, with early adoption encouraged. The Company early-adopted FAS 146 in the quarter ended December 29, 2002 and applied its accounting provisions to the restructuring activities initiated during the quarters ended December 29, 2002 and March 30, 2003 (see Note N). No restructuring activities were initiated during the quarter ended September 29, 2002.

     Accounting for Revenue Arrangements with Multiple Deliverables: In November 2002, the FASB’s Emerging Issues Task Force reached a consensus on EITF Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”). EITF 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple deliverables (products, services and/or rights to use assets). The provisions of EITF 00-21 will be applicable for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The Company is reviewing EITF 00-21 but has not yet determined the potential impact it will have on the Company’s financial position or results of operations, if any.

     Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others: In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”). FIN 45 requires a company that is a guarantor to make specific disclosures about its obligations under certain guarantees that it has issued. FIN 45 also requires the guarantor to recognize, at the inception of a guarantee, a liability for the fair value of the obligations it has undertaken in issuing the guarantee. FIN 45 also incorporates, without change, the guidance in FASB Interpretation No. 34, “Disclosure of Indirect Guarantees of Indebtedness of Others” which is superseded by FIN 45. FIN 45’s disclosure requirements are effective for financial statements for periods ending after December 15, 2002. The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued after December 31, 2002. The provisions of FIN 45 did not have a material impact on the Company’s financial position or results of operations upon adoption. (See Note L).

     Accounting for Stock-Based Compensation — Transition and Disclosure: In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure” (“FAS 148”), which amends Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation”, (“FAS 123”). FAS 148 provides alternative methods of transition for a voluntary change to the “fair value” method of accounting for stock-based employee compensation. In addition, FAS 148 amends the disclosure requirements of FAS 123 and requires prominent disclosure in both annual and interim financial statements of the method of accounting for stock-based employee compensation and the effect of the method used on a company’s financial position and results of operations. The transition guidance and annual disclosure requirements of FAS 148 are effective for fiscal years ending after December 15, 2002. The Company adopted the interim disclosure requirements of FAS 148 for financial statements in its fiscal quarter ended March 30, 2003. The Company intends to continue to account for its stock option plans and stock purchase plan under the provisions of Accounting Principles Board Opinion No. 25 “Accounting For Stock Issued to Employees” (“APB 25”) and Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation — an Interpretation of APB Opinion No. 25” (“FIN 44”).

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Accordingly, the adoption of FAS 148 is not anticipated to have a material impact on the Company’s financial position or results of operations.

     Consolidation of Variable Interest Entities: In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”), an interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements”. FIN 46 establishes accounting guidance for consolidation of a variable interest entity (“VIE”), sometimes formerly referred to as a special purpose entity. In general, a VIE is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46 applies to any business enterprise, both public and private, that has a controlling interest, contractual relationship or other business relationship with a VIE. FIN 46 provides guidance for determining when an entity, the Primary Beneficiary, should consolidate another entity, a VIE, that functions to support the activities of the Primary Beneficiary. FIN 46 will require the consolidation of a VIE by a company if that company is subject to a majority of the risk of loss from the VIE’s activities or entitled to receive a majority of the VIE’s residual returns or both.

     The effective date of the new rules under FIN 46 on the Company’s existing operating leases is the first quarter of fiscal 2004, and immediately on any new leases entered into after January 31, 2003, which utilize VIEs or equivalent lease structures. The adoption of FIN 46 could potentially result in the Company having to consolidate the operating results of certain existing lessor entities which may be VIEs, as defined, and which are lessors under some of the Company’s operating lease agreements and recognize the assets and related liabilities of the VIEs on the Company’s balance sheet. However, FIN 46 is not anticipated to have a material impact on the Company’s financial position or results of operations because the Company anticipates the operating lease agreements will be transferred to a new lessor that would not qualify as a VIE.

NOTE C — STOCK-BASED COMPENSATION PLANS

     The Company has adopted stock option plans that provide for the grant to key employees of options to purchase shares of Lam common stock. In addition, the plans permit the grant of nonstatutory stock options to paid consultants and employees, and provide for the automatic grant of nonstatutory stock options to outside directors. The Company also has a stock purchase plan that allows employees to purchase its common stock. The Company accounts for its stock option plans and stock purchase plan under the provisions of APB 25 and FIN 44.

     For pro forma purposes, the estimated fair value of the Company’s stock-based awards is amortized over the options’ vesting period (for options) and the respective four, six, twelve, or fifteen-month purchase periods (for stock purchases under the employee stock purchase plan). The following table illustrates the effect on net income (loss) and net income (loss) per share if the Company had accounted for its stock option and stock purchase plans under the fair value method of accounting under FAS 123, as amended by FAS 148:

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     Pro forma information regarding net income (loss) and net income (loss) per share is required by FAS 123 and FAS 148 for awards granted after June 30, 1995, as if the Company had accounted for its stock option and stock purchase plans under the fair value method of FAS 123 and FAS 148. The fair value of the Company’s stock options and stock purchase plans was estimated using a Black-Scholes option valuation model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and which are fully transferable. In addition, the Black-Scholes model requires the input of highly subjective assumptions, including expected stock price volatility. Because the Company’s stock-based awards have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion the existing models do not provide a reliable measure of the fair value of the Company’s stock-based awards. The fair value of the Company’s stock-based awards granted in the three- and nine-month periods of fiscal 2003 and fiscal 2002 was estimated assuming no expected dividends and the following weighted-average assumptions:

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NOTE D — INVENTORIES

     Inventories are stated at the lower of cost (first-in, first-out method) or market. Inventories consist of the following:

NOTE E — PROPERTY AND EQUIPMENT

     Property and equipment consists of the following:

NOTE F — INTANGIBLE ASSETS

     Effective July 1, 2002, the beginning of fiscal 2003, the Company adopted Statement of Financial Accounting Standards No. 142 “Goodwill and Other Intangible Assets” (“FAS 142”). FAS 142 requires that goodwill and certain other intangible assets be tested for impairment at least annually and written down only when determined to be impaired, replacing the previous accounting practice of ratably amortizing these items over their estimated useful lives. Intangible assets other than goodwill that have a finite life continue to be amortized over their useful lives. The Company has no goodwill or intangible assets with indefinite lives. The Company’s finite-lived intangible assets consist of purchased intellectual property rights and the licensed use of patents that are being amortized over their expected useful lives. Consequently, there was no impact on the Company’s financial position or results of operations upon the adoption of FAS 142.

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     The Company’s finite-lived intangible assets consist of the following:

     Total amortization expense for the three- and nine-month periods ended March 30, 2003, was $445,000 and $1,335,000, respectively compared to $445,000 and $795,000, respectively, for three- and nine-month periods ended March 31, 2002. Intellectual property rights have an estimated useful life of 5 years and licenses have an estimated useful life of 2.5 years. The weighted-average amortization period of all intangible assets is approximately 4.0 years.

     Estimated future intangible asset amortization expense for the remainder of fiscal 2003, and for the five fiscal years thereafter, is as follows:

NOTE G — DEFERRED COMPENSATION

     During the quarter ended December 29, 2002, the Company recorded $3.4 million of deferred compensation in stockholders’ equity, which was offset by a corresponding entry in additional paid-in capital in stockholders’ equity, in connection with the modification of terms of a fixed stock option award previously issued to an officer of the Company. The modification extended the contractual life of the stock option for a period of three years and added additional vesting requirements. However, no changes were made to either the number of shares of the Company’s stock subject to the option nor the option’s exercise price. Accordingly, the modification resulted in the remeasurement of compensation expense based on the option’s intrinsic value on the date of modification in accordance with the provisions of APB 25 and FIN 44. The deferred compensation amount of $3.4 million recorded during the quarter ended December 29, 2002 is being amortized ratably over the vesting period of the modified options, or 16 quarters. When the Nasdaq National Market closing price of Lam’s common stock reaches or exceeds $20.00 per share, all unvested shares will immediately vest and become exercisable on that date and all remaining deferred compensation will be recognized as compensation expense. Total compensation expense recognized for the three- and nine-month periods ended March 30, 2003 was $210,000 and $383,000, respectively.

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NOTE H — OTHER INCOME (EXPENSE), NET

     The significant components of other income (expense), net are as follows:

NOTE I — NET INCOME (LOSS) PER SHARE

     Basic net income (loss) per share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the period. The computation of basic net income (loss) per share for all periods presented is derived from the information on the face of the income statement, and there are no reconciling items in either the numerator or denominator.

     Diluted net income per share is computed as though all potential common shares that are dilutive were outstanding during the period. The following table provides a reconciliation of the denominators of the basic and diluted computations for net income (loss) per share.

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(1)  For purposes of computing diluted net income per share, weighted-average potential common shares do not include outstanding warrants or stock options whose exercise prices exceed the average market value of the Company’s common stock for the period.

     For the three-month period ended March 30, 2003, diluted net income per share included the assumed exercise of employee stock options, but excluded the assumed conversion of the convertible subordinated 4% notes because their effect would have been antidilutive. For the three-month period ended March 31, 2002, diluted net income per share included the assumed exercise of employee stock options and warrants, but excluded the assumed conversion of the convertible subordinated 4% and 5% notes because their effect would have been antidilutive. Outstanding options, warrants and convertible subordinated 4% notes for the nine-month period ended March 30, 2003, and outstanding options, warrants, and convertible subordinated 4% and 5% notes for the nine-month period ended March 31, 2002, were excluded from the computations of diluted net loss per share because their effects would have been antidilutive due to the net losses for the periods.

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NOTE J — COMPREHENSIVE INCOME (LOSS)

     The components of comprehensive income (loss), net of tax, are as follows:

     Accumulated other comprehensive loss, net of tax, is as follows:

NOTE K — LEASE COMMITMENTS

     During the third quarter of fiscal 2003, a lease agreement (“the Agreement”) relating to two properties (land and buildings) at the Company's Fremont, California campus was transferred to a new lessor and amended and restated. The Agreement replaces the former lease that was due to expire in March 2003. As part of the Agreement, the Company has the option to purchase the buildings at any time for approximately $54.4 million. In addition, the Company is required to guarantee the lessor a residual value on the property of up to $48.4 million at the end of the lease term, (in the case that lease is not renewed, the Company does not exercise its purchase option, and the lessor sells the property and the sale price is less than the lessor’s cost). Additionally, as part of the lease agreement, the Company maintains cash collateral of $54.4 million as of March 30, 2003 in separate specified interest-bearing accounts. The lessor under the Agreement is a substantive independent leasing company that does not have the characteristics of a VIE as defined by FIN 46 and is therefore not consolidated by the Company.

     In addition, the Company has two lease agreements with lessors relating to certain other properties (land and buildings) at its Fremont, California campus which involve lessors which could be considered VIEs and could potentially result in the consolidation of the lessors’ activities.

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The Company currently accounts for these lease agreements as operating leases and therefore, neither the leased facilities nor the related debt is reported in the Company’s accompanying balance sheets. These lease agreements require the Company to provide guaranteed residual values totaling up to $52.7 million at the end of the respective lease terms ($25.2 million in fiscal 2005 and $27.5 million in fiscal 2006). In January 2003, the Company provided $59.0 million of additional cash collateral under these lease agreements. The Company has the option to purchase the facilities for approximately $27.1 million and $30.0 million, respectively. No material impact is anticipated on the Company’s financial position or results of operations because the Company anticipates these properties will be transferred to a new lessor that would not qualify as a VIE prior to the implementation date of FIN 46.

NOTE L — GUARANTEES

     In November 2002, the FASB issued FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”. FIN 45 requires a company that is a guarantor to make specific disclosures about its obligations under certain guarantees that it has issued. FIN 45 also requires a company (“the Guarantor”) to recognize, at the inception of a guarantee, a liability for the obligations it has undertaken in issuing the guarantee.

     Lease agreements relating to certain facilities at the Company’s Fremont, California campus require the Company to guarantee residual values of the leased properties to the lessors at the end of the lease terms (in the case that the lease is not renewed, the Company does not exercise the purchase option, and the lessors sell the properties and the sale price is less than the lessors’ cost) of up to $101.1 million ($25.2 million in fiscal 2005, $27.5 million in fiscal 2006 and $48.4 million in fiscal 2008). The terms of the guarantees are equal to the remaining terms of the related lease agreements, which range from approximately two to five years.

     In March 2003, the Company transferred a lease agreement to a new lessor (Note K). Under the accounting provisions of FIN 45, the Company recognized a liability of $0.5 million for the related residual value guarantee of $48.4 million under the lease. The value of the guarantee was determined by computing the estimated present value of probability-weighted cash flows that might be expended under the guarantee over the lease term, discounted using the Company’s risk adjusted borrowing rate of approximately 2%. The value of the guarantee has been recorded as prepaid rent, with the offset recorded as a liability, and the amounts will be amortized to income (for the liability) and to expense (for the prepaid rent) on a ratable basis over the five-year period of the lease.

     The Company has issued certain indemnifications to its lessors under certain of its operating lease agreements, such as, indemnification for certain environmental matters. The Company has entered into certain insurance contracts to minimize its exposure related to such indemnifications. As of March 30, 2003, the Company has not recorded any liability on its financial statements in connection with these indemnifications, as the Company does not believe, based on information available, that it is probable that any amounts will be paid under these guarantees.

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     The Company has agreements with two financial institutions that guarantee payment of its Japanese subsidiary’s overdraft protection obligation. The maximum potential amount of future payments the Company could be required to make under these agreements at March 30, 2003, is approximately $5.0 million, the amount available under the overdraft protection agreement. As of March 30, 2003, the Company’s Japanese subsidiary did not owe any amounts under this agreement. The Company has not recorded any liability on its financial statements in connection with these guarantees, as the Company does not believe, based on information available, that it is probable that any amounts will be paid under these guarantees.

     The Company has an agreement with a financial institution to sell to the institution certain U.S. Dollar-denominated receivables generated from the sale of its systems, subject to recourse provisions. The Company insures these sold receivables for approximately 90% of their value and guarantees payment of the remaining uninsured receivable value in the event that the payment obligation is not satisfied. Based on historical payment patterns, the Company has experienced negligible default on payment obligations and therefore, believes the risk of loss is minimal. The terms of these guarantees are from 90 days past the due date of the receivable, until collected. At March 30, 2003, the maximum potential amount of future payments the Company could be required to make under this agreement is approximately $2.0 million. As of March 30, 2003, the Company has not recorded any liability on its financial statements in connection with these guarantees as the Company does not believe, based on information available, that it is probable that any amounts will be paid under these guarantees.

     Generally, the Company indemnifies under pre-determined conditions and limitations, its customers for infringement of third party intellectual property rights by its products or services. The Company seeks to limit its liability for such indemnity to an amount not to exceed the sales price of the products or services. The Company does not believe, based on information available, that it is probable that any material amounts will be paid under these guarantees.

     The Company provides standard warranties on its systems that run generally for a period of 12 months from system acceptance, not to exceed 14 months from the date of shipment of the system to the customer. The liability amount is based on actual historical warranty spending activity by type of system, customer, and geographic region, modified for any known differences such as the impact of system reliability improvements.

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     Changes in the Company’s product warranty reserves during the nine months ended March 30, 2003, were as follows:

NOTE M — DERIVATIVE INSTRUMENTS AND HEDGING

     The Company carries derivative financial instruments (derivatives) on the balance sheet at their fair value. The Company acquires and holds derivative financial instruments to hedge a variety of risks and exposures including interest rate fluctuation risks associated with our long-term debt, foreign currency exchange rate fluctuations on the value of expected cash flows from forecasted revenue transactions denominated in Japanese Yen and foreign currency denominated assets. Changes in the fair value of derivatives that are not designated or that do not qualify as hedges under Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“FAS 133”) are recognized in earnings immediately. The Company does not use derivatives for trading purposes.

     The Company’s policy is to attempt to minimize short-term business exposure to foreign exchange risks using the most effective and efficient methods to eliminate or reduce such exposures. In Japan, the Company generally sells its systems, spare parts and services under contracts denominated in Japanese Yen. Therefore, in the normal course of business, the Company’s financial position is routinely subjected to market risk associated with foreign currency rate fluctuations. To protect against the reduction in value of forecasted Yen-denominated cash flows resulting from sales in Japanese Yen, the Company has instituted a foreign currency cash flow hedging program. The Company has entered into foreign currency forward exchange contracts that generally expire within 12 months, and no later than 24 months. These foreign currency forward exchange contracts, designated as cash flow hedges, are carried on the Company’s balance sheet at fair value with the effective portion of the contracts’ gains or losses included in accumulated other comprehensive income (loss) and subsequently recognized in earnings in the same period the hedged revenue is recognized.

     For the three- and nine-month periods ended March 30, 2003, the Company recognized net losses of $148,000 and $122,000, respectively, for cash flow hedges that had been discontinued, because the original forecasted transactions did not or will not occur. The losses are recorded in other expense in the respective March 30, 2003 condensed consolidated statements of operations.

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     The following table summarizes activity in accumulated other comprehensive income (loss), net of tax, related to derivatives classified solely as cash flow hedges held by the Company during the nine months ended March 30, 2003:

     At March 30, 2003, the Company expects to reclassify the balance of deferred hedging gains and losses, net, included in accumulated other comprehensive (loss) to earnings during the next 12 months due to the recognition in earnings of the hedged forecasted transactions.

     The Company also enters into foreign currency forward contracts to hedge the gains and losses generated by the remeasurement of Yen denominated intercompany receivables. Under FAS 133, these are not designated hedges. Therefore, the change in fair value of these derivatives is recorded into earnings as a component of other income (expense), net and offsets the change in fair value of the foreign currency denominated intercompany receivables.

     The Company also has a policy to minimize, where possible and practical, the impact of interest rate exposure associated with its interest rate sensitive investments and debt obligations. To limit the impact relating to interest rate exposure associated with its fixed rate 4% Convertible Subordinated Notes (“4% Notes”), the Company is a party to an interest rate swap agreement (“the swap”) with a notional amount of $300.0 million. Under the terms of the swap, the Company exchanges the fixed interest payments on its 4% Notes for variable interest payments based on the London Interbank Offered Rate (“LIBOR”). The swap is accounted for as a fair value hedge under the provisions of FAS 133. Fluctuations in the fair value of the 4% Notes, resulting from changes in the LIBOR interest rate sensitive component, are recorded in earnings, and offset by changes in the fair value of the swap, which are also recorded in earnings.

     As a result of designating the swap as a hedge of its 4% Notes, the carrying value of the 4% Notes is adjusted to reflect changes in fair value attributable to changes in the benchmark interest rate. For the three-month period ended March 30, 2003, the carrying value of the 4% Notes included in long-term debt and other long-term liabilities decreased by approximately $0.3 million. Over the same three-month period, the fair value of the swap, included in long-term assets, decreased by approximately $0.3 million with the corresponding gains and losses for the three-month period recorded in other income (expense), net. For the nine-month period ended March 30, 2003, the carrying value of the 4% Notes included in long-term debt and other long-term liabilities increased by $13.8 million, (to $317.3 million at March 30, 2003). Over the same nine-month period, the fair value of the swap, included in long-term assets, increased by $13.6 million (to $16.9 million at March 30, 2003) with the corresponding offsetting gains and losses for the nine-month period recorded in other income (expense), net.

     For the three- and nine-month periods ended March 30, 2003, the Company recognized net losses of $7,000 and $179,000, respectively, in other income (expense), net, resulting from hedge

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ineffectiveness related to differences in changes in the fair value of the swap and changes in the fair value of the 4% Notes.

NOTE N — RESTRUCTURING ACTIVITIES

Fiscal 2003 Restructuring Activities

     Restructuring charges have been incurred by the Company to respond to depressed levels of capital investment by the semiconductor industry and the Company’s strategic plans. The Company evaluated its employment levels, its outsourcing plans and the impact on manufacturing and administrative facilities in light of its revenue outlook, and its forecasts. Based on this evaluation, senior management of the Company committed to cost reduction and exit activities in the quarters ended March 30, 2003 (“the March 2003 Plan”) and December 29, 2002 (“the December 2002 Plan”). Prior to the end of the March 30, 2003 and December 29, 2002 quarters, management with the proper level of authority, approved specific actions under the respective Plans, and communicated the severance packages to potentially impacted employees in enough detail that the employees could determine their type and amount of benefit. The termination of the impacted employees occurred as soon as practical after the restructuring plans were announced. Lease payments on vacated facilities are based on management’s estimates using known prevailing real estate market conditions at that time. Leasehold improvements relating to the vacated buildings were written off as these items will have no future economic benefit to the Company and have been abandoned. The Company applied the accounting provisions of FAS 146 to the fiscal 2003 restructuring activities as the Company early-adopted FAS 146 during the December 2002 quarter. Under the provisions of FAS 146, the restructuring charges for the remaining contractual lease payments on vacated facilities were recognized in the quarter in which the Company no longer occupied the facility. As a result of all the fiscal 2003 restructuring activities, the Company expects annual reductions in costs of goods sold and operating expenses that will support the Company’s goal to achieve breakeven operating performance at $180 million in quarterly revenues.

March 2003 Plan

     The Company began carrying out the announced restructuring activities prior to March 30, 2003, by reducing its workforce in North America and Europe by approximately 50 people and by vacating selected facilities located in North America determined to be no longer critical to the Company’s operations. The employees included in the Plan were from a broad range of organizations and at multiple levels throughout the Company, with the majority of the reductions in North America. The Company recorded a restructuring charge during the quarter ended March 30, 2003, of approximately $4.7 million, consisting of severance and benefits for involuntarily terminated employees, charges for remaining lease payments on vacated facilities, and the write-off of related leasehold improvements.

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     Below is a table summarizing activity relating to the March 2003 Plan: